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The risk-free interest rate is 3.7% per year, the market risk premium is 5.6% per year, and a stock’s beta is 0.84. What is the stock’s annual expected return? Question 16 options: A) 9.8% B) 8.4% C) 9.1% D) 9.5% E) 8.7%

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tutordamola

Answer:

The answer is B. 8.4%

Explanation:

To solve this, we will use Capital Asset Pricing Model(CAPM)

Stock’s annual expected return=

Rf + beta(Rm-Rf)

Rf is the risk free rate

Risk premium is (Rm-Rf) - the difference between market interest rate and the risk free rate.

Rf is 3.7%

Risk premium is 5.6%

Beta is 0.84

3.7% + 0.84(5.6%)

3.7% + 4.7%

= 8.4%

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